ROSNEFT CEO BOGDANCHIKOV OPTIMISTIC

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 005835

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DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT
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DOE FOR HARBERT, HEGBORG, EKIMOFF
DOC FOR 4231/IEP/EUR/JBROUGHER

E.O. 12958: DECL: 12/03/2017
TAGS: EPET, ENRG, ECON, PREL, RS, PINR
SUBJECT: ROSNEFT CEO BOGDANCHIKOV OPTIMISTIC


Classified By: Ambassdor William J. Burns for reasons 1.4 (b) and (d)

1. (C) Summary: Rosneft CEO Sergey Bogdanchikov told the
Ambassador December 13th that he is optimistic about the
company's future, noting in particular that its large Vankor
field should come online in 2008. Bogdanchikov dismissed
claims the company was overextended as a result of recent
acquisitions and said Rosneft would be able to secure any
needed credit. He expressed satisfaction with Rosneft's
Sakhalin 1 partnership with ExxonMobil and said he supported
a market price for the field's gas, despite pressures to the
contrary from Gazprom. Bogdanchikov did not see any major
structural changes in Russia's oil industry in 2008 and
insisted Rosneft has no interest in the non-BP half of
TNK-BP. On the Burgas-Alexandropoulis pipeline (BAP),
Bogdanchikov said the day a final deal is signed to make the
pipeline a reality "is the day we will have final agreement
on CPC expansion." Finally, Bogdanchikov dismissed rumors
that he will enter politics in Sakhalin, and indicated he is
staying put. End Summary.

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OPTIMISTIC ON ROSNEFT'S FUTURE, BAP AND CPC
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2. (SBU) In a December 13th meeting with the Ambassador,
Bogdanchikov focused on Rosneft's performance, optimistically
outlining the company's operations and future. Bogdanchikov
claimed Rosneft's 10% organic growth (growth excluding
acquisitions) in oil production in 2007 was among the best
rates in the industry world-wide, and he expected 7-8%
organic growth in 2008. The company is replacing over 100%
of reserves and that its large Vankor field has proven bigger
than expected. He said production from Vankor will begin in
2008, despite construction delays on the East Siberian
Pacific Ocean (ESPO) pipeline. Since Vankor will be
connected to the Transneft system, it would not require ESPO
until 2010, when Vankor production would exceed current
Transneft capacities.

3. (SBU) Bogdanchikov said Rosneft isn't planning further
major upstream acquisitions, but that it would consider
"attractive" opportunities that arise. Rosneft plans to
boost production from the current 100 million tons (2 mbd) to
160 million tons (3.2 mbd) by 2015. Bogdanchikov added that
Rosneft plans to focus more on refining. It will sell less
crude and process more in its own refineries. The company
plans to invest $15 billion in refining by 2020, mostly on
acquiring refineries and upgrading its own.

4. (SBU) Rosneft, as a shareholder in the BAP and as a
shareholder and user of the Caspian Pipeline Consortium
(CPC),fully supports construction of the BAP as well as CPC
expansion. According to Bogdanchikov, "the day a final deal
is signed on the BAP is the day a deal will be signed on CPC
expansion." He was optimistic that these deals would be
concluded soon, as congestion in the Bosporous adds costs for
all producing companies. He predicted that BAP construction
and CPC expansion could both be completed in 18 months once
the agreements are inked.

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TRANSPORT TARIFFS, SUBSOIL AMENDMENTS, AND SAKHALIN 1
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5. (SBU) Bogdanchikov said he believes the GOR will implement
a common pipeline tariff for access to the Transneft system,
which he called more "market oriented," because it would
replace the current differentiated system. (Note: A common
tariff is considered necessary to fund the ESPO, whose costs
have escalated. A common tariff would, in effect, subsidize
the ESPO at the expense of shippers moving oil west.)

6. (SBU) Bogdanchikov was hopeful that anticipated amendments
to subsoil legislation would be passed in 2008, allowing new
license auctions and extending the current five-year licenses
for off-shore production. He also expected that new tax
incentives, currently granted for some East Siberia
greenfield developments, would be extended to cover offshore
projects. He said new license blocks will be complicated to
develop and that companies need to get started on them as
soon as possible.

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7. (SBU) Bogdanchikov was positive about Rosneft's
partnership with ExxonMobil in Sakhalin 1. Regarding gas
sales out of Sakhalin 1, Bogdanchikov said Rosneft believes
that the consortium should seek the best commercial terms,
"regardless of to whom or in what market" the gas is sold.
He suggested, however, that scheduled domestic gas price
increases may help resolve the current stalemate with
Gazprom, which insists Sakhalin 1 gas be sold to it
domestically.

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DEBT RESTRUCTURING AND CONSOLIDATION
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8. (SBU) Regarding Rosneft's vast debt and rumored
difficulties in obtaining credit, Bogdanchikov said the
company already has an agreement with banks to extend the
term of its current $20 billion bridge loan. He was
"absolutely sure" there would be no problems restructuring
its debt on favorable terms. He expressed confidence in U.S.
credit markets, noting that "even the Fed is helping us" keep
debt service costs down.

9. (SBU) Commenting on rumors of further consolidation in the
oil sector, Bogdanchikov said there has been no decision on
merging with Surgutneftegaz, and that Rosneft is not
interested in buying the "Russian half" of TNK-BP. He
claimed that TNK-BP's production efficiencies and assets were
substantially inferior to Rosneft's and that such an
investment wouldn't make sense -- "it would be better to
drill new wells." On the rumored restructuring of the
Ministry of Industry and Energy, Bogdanchikov said that given
the inauguration in the spring, he didn't see time for such
changes. Although "as an oil man" he would like to see a
ministry devoted to energy, he has not seen any preparations
for doing so.

10. (SBU) In response to the Ambassador's question about
Bogdanchikov entering politics in Sakhalin Oblast,
Bogdanchikov said such suggestions were "totally rumors." He
claimed he has never been interested in pursuing political
office and plans to stay on at Rosneft, but did not comment
on recent resignations of three of his deputies.

11. (C) Bogdanchikov's depth, vision, and presentation were
impressive, as usual. His forecast, however, is at odds with
conventional wisdom here. Most analysts with whom we have
spoken believe further consolidation in the Russian oil
sector is inevitable and that, after 10 years at the helm,
Bogdanchikov may be on his way out.
BURNS